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TDS IS PART OF SUM PAYABLE TO PAYEE and is trading liability- interest paid for delayed deposit of TDS is allowable expenditure

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TDS IS PART OF SUM PAYABLE TO PAYEE and is trading liability- interest paid for delayed deposit of TDS is allowable expenditure
By: CA DEV KUMAR KOTHARI
October 13, 2017
  • Contents

References and links:

Lachmandas Mathura vs. CIT 254 ITR 799 (SC) 1997 (12) TMI 16 - SUPREME Court Interest paid on sales tax arrears is deductible u/s. 37(1) Ld. CIT(A) after considering the submission of assessee has deleted the addition made

Commissioner Of Income-Tax Versus Mysore Electrical Industries Limited 1991 (3) TMI 30 - KARNATAKA High Court

- Interest for failure to pay PF contribution was held deductible u/s. 37(1).

Bharat Commerce And Industries Ltd. Versus Commissioner of Income-Tax 1998 (3) TMI 2 - SUPREME Court

Recent judgment of Kolkata ITAT in case

DCIT, Circle-3(1), Kolkata Vs.  M/s Narayani Ispat Pvt. Ltd dt. 30.08.2017 in ITA No.2127/Kol/2014 for  Assessment Year: 2010-11 2017 (10) TMI 67 - ITAT KOLKATA

Summary:

TDS/TCS are part of sum payable for business expenses. Deposit of TDS/ TCS results into payment to payee who get credit for TDS/ TCS deposited. In case of delay in deposit of TDS/ TCS, interest is payable for such late deposit. This is in relation to business expenditure. Therefore, interest paid for delay in deposit of TDS/ TCS is also a business expenditure. In this article author had discussed several aspects of TDS/TCS . Recently honourable Kolkata ITAT has considered this issue and allowed such interest under section 37.

This judgment of ITAT, on issue of interest for late deposit of TDS seems to be first reported judgment. In the judgment ITAT has also not referred to any other judgment on the issue.This way we can consider that generally such interest is being allowed by tax authorities.

Tax Deducted at Source(TDS) and Tax collection at source (TCS)

Tax may be deducted from various sums payable by assessee to his employees, service providers and suppliers. The tax has to be deducted as per provisions and then deposited within time prescribed from time to time.

Similarly Tax may be collected from customers or suppliers of goods as per law. TCS is also required to be collected in respect of prescribed transactions and then deposited within prescribed period.

TDS and TCS are part of trading or business operations:

In case of assessee engaged in business or profession he employ people or receives services from others, purchase or sell goods in course of business. TDS and TCS are intimately connected to such business operations.

Just like GST, VAT, sales tax, profession tax, or any other tax collected from other parties or otherwise  payable in account of other government or authorities the amount of  TDS and TCS are also payable. Amount of TDS and TCS arises in course of business or profession and such obligation is imposed on assessee and therefore, he deduct or collect tax and then pay to  or deposit in account of concerned government or its department, as per prescribed method of deposits in banks or treasury. 

TDS is part payment of business expenditure or trading liability:

TDS is a part of payment to be made to payee (supplier or service provider).

For example:

A. Suppose gross salary payable is ₹ 1000 K, out of which following deductions are made

For PF                                             ₹ 100 K

For profession tax                           Rs.  10 K

TDS                                                 Rs.  90 K

Net salary payable to employees    ₹ 800 K

In accounting entry ₹ 1000K will be debited to salary account, deductions will be credited to respective accounts. Then when payments are made respective account will be debited.

Salary of ₹ 1000 K (Rs. ten lakh) is allowable expenditure. PF, PT, and TDS are sums withheld by employer and are deposited in respective account, for which employees will get credit as the sums were deducted from their salary. Gross salary of ₹ 1000K is income of employees. The will get deductions for sums deducted from their salary. TDS will also be credited in their account with Income-tax Department and it will be reflected in their TDs report in form 26AS. PF will be credited in their account. Profession tax is tax paid on behalf of employees and is allowable in their hands against salary income.

Therefore, the amount first deducted and then  paid or deposited  for PF, P.Tax and TDS are part and parcel of salary payable by employer.

B. payment to contractor:

Suppose gross sum payable to a contractor is Rs. ten lakh, out of which TDS is ₹ 20K. The assessee shall pay ₹ 980K to contractor and deposit ₹ 20K as TDS for which contractor shall get credit against income-tax payable by him.

C. payment to professionals:

Suppose gross sum payable to a professional is Rs. ten lakh, out of which TDS is Rs. one lakh. The assessee shall pay ₹ 9 lakh to professional and deposit Rs. one lakh  as TDS for which professional  shall get credit against income-tax payable by him.

TDS can also be at lower rate:

Suppose contractor or professional furnishes permission or order form his Assessing Officer (AO) for TDS at lower rate, then the assessee will deduct tax at such lower rate and deposit amount based on such rate. The amount so deducted will be deposited and balance amount shall be payable to the contractor or professional.

Similarly in case of payment of salary, the amount of TDS can be lower, if employees had made investments in tax saving scheme and furnished evidence to the employer.

TDS is against personal liability of tax payable by payee:

Above  discussions and examples are given just to emphasise that the payment of salary to employees or to contractors and professionals are made in course of business or profession and TDS is a part of full amount payable by assessee to his employees, contractor or professionals.

The sum do TDS is tax paid on behalf of payee. This will be adjusted against tax liability of payee. This will be credited in account / PAN of payee and reflected in tax credit in form 26AS.

Tax deductor has separate and independent personal liability to pay his income-tax

Tax deductor also earn income and he has separate and independent personal liability to pay his income-tax, on the total income which he earns during any previous year. A tax deductor, may not have tax liability due to exemption or loss. Even if there is no personal liability of income-tax, still he is liable to deduct or collect tax if makes payment of prescribed sums from which tax is to be deducted or collected.

This also make clear that the amount of TDS is not part of tax payable by tax deductor on his income. The tax deductor has to pay his income-tax separately. This can be by way of TDs of various sums received by him if they are subject to provisions of TDS/ TCS , balance income-tax payable by him has to be paid by him by way of instalment of advance tax, self- assessment tax, and in case on assessment additional liability arises, then pay tax determined by AO. These are his personal liabilities and his income-tax is payable out of his income. 

Interest payable to employee, supplier service provider is allowable:

Suppose there is delay in payment of salary, or payment to contractor or professional and assessee is to make payment of interest for such delay, then interest so payable / paid will be allowable expenditure.

 Allowability of interest payable under two circumstances:

In case TDS / TCS is deposited late, interest is payable by tax deductor / tax collector.

As discussed earlier, TDS is in discharge of business expenditure. Therefore, in case there is delay in deposit of TDS, interest paid for such delay should be allowed as business expenditure being incidental to business or profession and in relation to business expenditure.

In case instalment of advance tax, and self- assessment tax or assessed tax is paid, then also interest is payable by assessee. However, this is for delayed payment of personal income-tax of assessee and not of any other person. This is for delayed discharge of personal tax obligation. The income-tax payable by assessee on his income is not allowable, so the interest payable for delayed deposit of such tax is also not allowable.  

The position about allowability of interest for delayed deposit of statutory liabilities like Excise duty, GST, VAT, sales tax, Cess, is well settled. Generally interest payable is compensatory in nature and is allowable. In other words, when it is compensatory in nature and is not in nature of penalty it is allowable.

However, allowability of interest for late deposit of TDS  is a bit new area of litigation. Based on discussion, made hereinbefore, author had always considered that interest for delayed deposit of TDS/ TCS is allowable expenditure. However, when sums involved are small, assesses may avoid litigation.

Recent judgment of Kolkata Tribunal:

Recently a judgment, as referred in opening of the article, was pronounced in which some of aspects as discussed by author were considered in relation to allowability of interest paid for late deposit of TDS. The Tribunal, while confirming order of CIT(A) and dismissing ground of revenue, held that interest for delayed deposit is also allowable under section 37 of the Income-tax Act, 1961. 

The relevant ground (with highlights added by author about interest on delayed deposit of TDS) reads as follows:

     “ On the facts and circumstances of the case, the Learned CIT(A) is not justified in deleting disallowance of interest of ₹ 15,880/- on service tax and Rs.70,000/- on TDS  because of the fact that the assessee failed to deposit the taxes of other parties to the other parties to the Central Government account within due time.

xxx

Relevant facts on the issue of interest on TDS are analysed below:

 The assessee during the year has claimed the interest & finance expenses in its profit and loss account for ₹ 3,48,00,349.00 which inter alia  includes  Interest paid for late deposit of  TDS  amounting to ₹ 70,777/-            

Assessing Officer was of the view that interest paid for  the late payment of TDS is not allowable for the deduction from the income.

 AO relied on the judgment of Hon'ble Supreme Court in the case of  Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 1998 (3) TMI 2 - SUPREME Court and  disallowed the claim of such  interest

On appeal of  assessee the  Ld. CIT(A) allowed the claim . Considering submission of assessee the the ratio laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) has been misunderstood by the AO as, in that case,  the disallowance was made on account of interest under section 215 of the Act due to the delay in the payment of income tax on the income disclosed under Voluntary Disclosure of income and Wealth Act, 1976.

In the case before CIT(A)  the issue relates to the interest charged on account of late deposit of TDS and not personal income-tax on income of assessee.

Assessee relied on Lachmandas Mathura vs. CIT 1997 (12) TMI 16 - SUPREME Court in which case  Interest paid on sales tax arrears is deductible u/s. 37(1) and CIT vs. Mysore Electrical Industries Ltd. 1991 (3) TMI 30 - KARNATAKA High Court  = 196 ITR 884 (Kar)in which interest for failure to pay PF contribution was held deductible u/s. 37(1) .

Ld. CIT(A) after considering the submission of assessee has deleted the addition made

by the AO by observing as under:-

             “4-. Ground No. (i) relates to disallowance of ₹ 86,657/- made by the Assessing Officer  The total amount of ₹ 86,657/- includes ₹ 15,880/- towards interest paid on service tax and ₹ 70,777/- towards interest disallowed the same following the decision of Hon'ble Supreme Court in the case of  Bharat Commerce And Industries Ltd. Versus Commissioner of Income-Tax 1998 (3) TMI 2 - SUPREME Court = 230 ITR 733(SC). However, in that case the dispute was related to allowability of interest u/s.139 & 215 of the IT Act, 1961 whereas in the present case the expenditure related to interest paid on service tax and interest paid on TDS. In view of the facts and submission of the appellant, I find that the expenses are allowable u/s. 37 of the IT Act, 1961 as the same were incurred wholly and exclusively for the purpose of business. Therefore, the AO was not justified to disallow the same. Hence, he is directed to delete the addition.”

 Analysis of order of ITAT on issue of interest for TDS:

  • Tribunal considered the rival contentions of both the parties and perused the material available on record.
  • The AO has disallowed the interest expenses incurred by the assessee on account of late deposit of TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) (Supra) in which the Supreme Court has settled law that when interest is paid for liability to pay income tax by assessee ( that is personal income-tax) and interest is levied for late payment under any provision ( in that case it was S.139 and 215 **of I.T. Act) then such interest will not be allowable because income-tax itself is not allowable. In conclusion it was held as follows:

Under the Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction.

Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37.

Per author:  (** At present such interest on own tax liability  will be u/s 234A, 234B and 234C) and this will not be allowable.

The Tribunal noted that the facts of the instant case  are distinguishable as in the case is for interest  paid for delayed deposit of  TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature.

As such the interest on delayed payment is not in the nature of penalty.

The issue of delay in the payment of service tax is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura vs. CIT 254 ITR 799 (SC) 1997 (12) TMI 16 - SUPREME Court in favour of assessee. The relevant extract of the judgment is reproduced below (highlights added): 

            “The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT 1978 (5) TMI 22 - ALLAHABAD High Court  = [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT 1983 (10) TMI 49 - ALLAHABAD High Court  = [1983] 144 ITR 732 (All.) (FB), wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue.” 

Tribunal held that in view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction.

Then Tribunal held that The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee from the payment to the party deducts certain percentage as specified under the Act as TDS and pays to the Government Exchequer. The amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to the Government Exchequer. Thus the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon’ble Apex Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand.      

Accordingly Tribunal concluded that :

Law laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) is not applicable in the instant facts of the case. And that the  Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd.(supra).

Law laid down by the Hon'ble Supreme Court in the case of Lachmandas Mathura (Supra) in which Hon’ble Supreme Court has  allowed the deduction on account of interest on late deposit of sales tax u/s 37(1) of the Act. In view of the above, we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1) of the Act.

Therefore Tribunal confirmed order of CIT(A) and  dismissed  ground of Revenue.

Conclusion:

The order of the ITAT is based on settled legal position by way of precedence from the honourable Supreme Court. The law applied is correct. On facts also as discussed in article, TDS is nothing but a part payment to payee. If there is delay in such part payment and tax deductor is required to pay interest, such interest is also an allowable expenditure.

Author hopes that revenue will not challenge the judgment of ITAT. 

 

By: CA DEV KUMAR KOTHARI - October 13, 2017

 

 

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